Don't jump off the fiscal cliff, says tax expert

Wealth planner tells advisers not to make tax decisions based on 'what if's'

Oct 1, 2012 @ 12:38 pm

By Mark Schoeff Jr.

The looming fiscal cliff has most investment advisers on edge, but one tax expert is cautioning them not to jump off.

“We don't know if taxmageddon is upon us,” John Kilroy, a senior wealth planner at The Vanguard Group Inc., told a session Monday at the Financial Planning Association's annual conference in San Antonio. “Focus your tax planning on this year.”

Instead of trying to plan based on guesses about what's going to happen Jan. 1, when a combination of tax increases and spending cuts goes into effect, unless Congress acts, advisers should concentrate on the basics of tax planning and consider moves to achieve tax efficiency, Mr. Kilroy said.

“To specifically try and plan for something we just don't know about is a gamble,” Mr. Kilroy said in an interview. “Whatever comes down the road is going to be changed again.”

Advisers should be cautious when clients insist on taking capital gains while the rate is still 15%.

“There's no guarantee we won't see 15% —or something better — [in the future],” Mr. Kilroy said.

AMT sweet spot

One of the steps advisers may want to take is to calculate whether their clients fall within the income range in which the alternative minimum tax is to be phased out. If they are within that range, they would be taxed at the marginal rate — for example, 35% for the highest earners.

But if they take a Roth individual retirement account conversion to boost their adjusted gross income, they can move out of the marginal range and back to the 28% AMT rate. It's the area that Mr. Kilroy calls the “AMT sweet spot.”

Many investment advisers are leery of dealing with the AMT, Mr. Kilroy acknowledged. But he urged them to make it part of their tax planning routine.

“There are certain situations you want to embrace it, not dread it [or] avoid it,” Mr. Kilroy said.

The so-called AMT patch, which establishes the income level at which the AMT does not apply, is one of many tax policies that Congress has not yet renewed. There was some hope that it would be part of a tax-extenders package that would pass before the election. But, like the rest of the issues pushing the country closer to the fiscal cliff, that bill fell prey to politics.

“In the lame-duck session, they're probably going to create some kind of short-term extension [of all tax cuts],” Mr. Kilroy predicted.

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